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Commodities Corner: Energy Sector in Flux

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2023-04-10

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Oil prices had a big week last week thanks to those surprise production cuts by the OPEC+ group.

In cutting global production by a further 1.1 million barrels a day the OPEC+ group has not only helped Russia, helped their own budgets and taken a pre-emptive move to counter a feared recession in the next year or so, but have laid the ground for major oil companies to start a round of consolidation.

In effect, US analysts in particular think the production cut which now totals 3.6 million barrels a day, will see oil prices remain around $US80 to $US100 barrels instead of remaining around or under $US70 a barrel for US West Texas Intermediate crude and $US80 a barrel for the global benchmark, Brent - as both were starting to do in March.

Brent crude ended at $US85.12, up around 6.5% for the week (and no higher than the first day jump on Monday in the wake of the cut news). US West Texas Intermediate style crude also added 6.5% to end at $US80.70 a barrel.

Both are higher this year by a small margin, but are down 15% or more on a year ago when they surged after the Ukraine invasion by Russia. Both drifted higher in light Asian trading on Monday.

The output cut and price jump might have upset western governments and consumers but it has been music to the profit and loss accounts of big and little oil companies.

While there has been considerable speculation about possible takeovers and mergers in the wake of the Russian invasion of Ukraine sending oil prices soaring to around $US130 a barrel, there has been little real corporate action.

Analysts think it's only a matter of time before there’s an outbreak of mergers and acquisition activity among oil majors.

Only days after the OPEC+ cut, news emerged at Easter of what could be one of the biggest deals of all - the $US60 billion plus takeover of the largest US shale operator, Pioneer Natural Resources by the giant Exxon Mobil Corp.

Analysts say that by underwriting a price boost with the production cut, OPEC+ has removed the possibility of a slide in world prices that might have seriously damaged the finances of deals such as that reported to be coming from Exxon Mobil.

In effect, OPEC+ has given a lot of certainty to revenues for oil companies large and small which will help many analysts maintain their optimism for the sector this year. That in turn would make them more receptive to mergers and acquisitions of the sort Exxon Mobil has reportedly been eyeing.

According to a Wall Street Journal report, discussions between Exxon and Pioneer are at an early stage and informal.

Exxon views Pioneer as a top target to put its "windfall profits to use," the WSJ report said, adding that the talks may not lead to formal negotiations and Exxon may target another company.

Any offer for Pioneer would have to be at a decent premium and probably involve shares because investors would frown on the use of Exxon’s cash reserves (now that cash is earning semi decent returns).

Exxon last year earned a record $US55.7 billion on sky high oil and gas prices and ended the year with $US29.6 billion in cash and equivalents. Pioneer reported net earnings of $US7.8 billion

Exxon last week signalled that its first-quarter operating profits may be down around 25% from the fourth quarter of last year, as oil and gas prices eased and refinery maintenance costs rose. Results for the March quarter are expected to be reported on April 28.

Pioneer, the third-largest producer of oil after Chevron Corp and ConocoPhillips in the top US shale basin (The Permian), denied a media report six weeks ago that it was considering an acquisition of smaller rival Range Resources Corp.

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Meanwhile the US Comex gold price eased 0.6% to around $US2,023 at the Easter break, but dipped to around $US2,018 an ounce in light Asian trading on Monday.

That also saw Comex silver prices regain the $US25 an ounce level and end there before Easter.  Copper prices ended around $US4.01 a pound before Easter and was higher in Asia on Monday.

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